Why Is Treasury Management Critical?
By assessing the structure of your cash assets, a treasury management process creates an additional layer of safety for your organization’s finances, but that isn’t the only purpose.
Organizations also implement a treasury management strategy because they strive for strategic management of each portion of an organization’s enterprise value—and cash is an important piece of this strategy.
Whether it’s adding more to your bottom line or organizing around your capital structure to increase ROI with strategic reserves, having an investment policy statement helps streamline that decision-making process.
Is Treasury Management the Same as Cash Management?
Cash management relates to daily cash flow and what you need to operationally run your business; it’s focused on the day to day.
Treasury management, meanwhile, is more strategic.
The approach is focused on long-term success with an investment policy statement as your guiding light. An investment policy statement helps you track, monitor, benchmark, and pivot your treasury management needs, according to the fluctuations of your business and the market environment.
What Is Treasury Management as it Relates to Banks?
Typically, treasury management at a bank is focused on the operational cash needs of your business, not necessarily planning around your long-term strategic reserves.
For private business, it’s key to supplement services from your financial institution with an investment policy statement. This takes your entire business into account and can help you understand the following strategies, among other things:
- How much cash you have and need on your balance sheet
- How your investment policy statement integrates with your tax structure
- How you define your investment risk tolerance
- How your investment policy statement affects your personal tax situation as a business owner
It takes strategic management to link your banking decisions with tax planning for you and your business as well as other organization objectives.
How to Create a Strategic Investment Policy Statement in 6 Steps
Following are six steps to begin building your treasury management function with the eventual implementation of a strategic investment policy statement (IPS)—all with the goal to mitigate financial risk and identify ROI opportunities.
The six steps:
- Evaluate your current exposure
- Review your historical cash needs
- Project your future cash needs
- Assess risk and impact to your outside partners
- Structure your treasury management function, accordingly
- Implement a strategic investment policy statement
1. Evaluate Your Current Exposure
As a first step, it’s important to take a holistic view of the cash and cash equivalent assets you hold on your balance sheet.
Questions to Explore
- What cash and marketable securities are you holding today? Is it in cash, money markets, CDs? Do you have treasuries?
- Which financial institutions are these assets held in?
- What’s the timing of maturity for your cash and cash-like assets?
2. Review Your Historical Cash Needs
The next step is to review how your cash has ebbed and flowed over the last business cycle.
As a business owner, it can be insightful to take a detailed review of how your cash has changed throughout time. This data can provide an important perspective into understanding if there are layers, or buckets, of cash that could be considered short-term (operational), intermediate (flexible), and long-term (strategic).
Knowing each of those buckets can lend important insights into how you might be able to structure this capital going forward.
Questions to Explore
- Over the past 12–24 months (or the typical cycle for your business), what have been your needs for liquidity?
- What are your working capital requirements and what might be considered short-term (operational), intermediate (flexible), and long-term (strategic) cash amounts?
3. Project Your Future Cash Needs
Most immediately, understand your cash needs through the next 12 months.
Questions to Explore
- Based on your historical review and assessment of your industry’s economic conditions, what will your short, intermediate, and strategic cash needs look like?
- Are there any major capital needs within your business that could present an opportunity or risk?
- Are there tax regulatory changes or opportunities that could provide an adjustment to your cash needs?
4. Assess the Risk and Impact to Your Outside Partners
In this step, it’s important to understand the risk profile that ownership may be looking for and any connected interests that outside parties might have in the structure that you choose.
Put a process in place to ask ownership and those outside parties what they think and expect.
Questions to Explore
- What’s the personal tolerance level for shareholders or business owners when it comes to capital risk?
- How might cash flow management play into your personal goals of ownership?
- Do you have any outside parties—insurers or strategic partners, for example—that require a specific type of capital structure?
5. Structure Your Treasury Management Function, Accordingly
Many businesses structure their treasury management function across an operating account and strategic reserves to drive additional yield and ROI as well as seek to protect their capital.
Think of this structure as the interplay between the current operational cash needs and your long-term cash strategy.
Operating accounts are best established at a well-capitalized bank, which is defined by the FDIC as “a depository institution that significantly exceeds the required minimum level for each relevant capital measure.”
In addition to the above four steps, here are additional considerations:
- Determine your working capital needs for this account based on monthly cash flow needs and your annual business cycle
- Identify major capital expenditures
- Evaluate credit and lending needs along with the specific covenant requirements you have with your bank
As a private business, think about how strategic reserves affect shareholder objectives.
There are several key differences between bank and brokerage accounts that relate to trading, costs, borrowing, service, and the like. For those unfamiliar with brokerage accounts, strategic reserves are often held in a brokerage account that links to your operating account.
Strategic reserves often include a wide range of instruments, such as money market funds, CDs, government and agency bonds, corporate bonds, among others; these are your tools in this process.
All financial institutions are responsible for the safekeeping of client assets. The specific protections depend on the type of account, by institution (and its respective regulatory agency), and by asset type.
For example, brokerage accounts have specific safeguards that prevent broker-dealer firms from using customer assets to finance their own proprietary business operations. This is designed to protect and segment customer assets from those used by the brokerage firm for their business.
6. Implement a Strategic Investment Policy Statement
Similar to how your strategic plan guides your organization, the investment policy statement is the strategic plan for your liquid capital.
It gives you a customized framework to reference when you track, monitor, benchmark, and pivot according to your organization’s strategies and needs as well as the marketplace environment.
Other benefits of an investment policy statement include:
- Segments liquid assets into buckets based on their time horizon for use
- Controls and monitors risk
- Streamlines cash flow management
- Incorporates tax planning and efficiency
- Documentsdecision-making processes
- Benchmarks progress
Your Competitive Advantage
It’s typical for private companies to not have the in-house investment resources of large public companies. This is why many businesses consider supplementing their internal financial expertise by working with an independent advisory team to help build out an investment policy statement in alignment with their organization’s existing corporate tax planning and strategic goals.
We’re Here to Help
For more information on executing a treasury management function, contact your Moss Adams professional or send us a question below.