Spring Clean your Treasury Policy

John Snow famously advised us all that “winter is coming” but as we’ve trundled through 2023 it started to feel like it would never end.

But, soft! What light through yonder window breaks? Is that summer already?

Spring may have slipped by unnoticed but that doesn’t mean we can collectively skip the annual spring cleaning activities. Whether personally, or in our corporate roles, this time of year is always a good opportunity to take stock of the stuff we have collected over the years, especially the worn-out practices that we continue to follow by force of habit, and consider how we might freshen things up.

Marie Kondo, the famous Japanese organising consultant, has transformed the way many people approach their annual spring clean by employing a unique selection criterion – choosing to keep what sparks joy! By following the KonMari method, you are not choosing what to discard but rather choosing to keep only the items that speak to your heart.

Now, Treasury Policies and Joy are not natural bedfellows but, bear with me as I try to demonstrate how applying an annual spring clean of your policy could lead to greater efficiencies in your business and ultimately remove some of the pain points that can lead to joy’s great nemesis, stress!The Association of Corporate Treasurers (ACT) describes Treasury policies as the mechanisms by which the board, or risk management committee (RMC), can delegate financial decisions in a controlled manner. Treasury policies will govern many activities that treasury professionals undertake including FX risk, interest rate risk etc. but here I am going to focus on cash investment policies.

What should we be looking at when beginning to clean up our treasury policies with respect to cash investment policies?

1.Find the cash: Sounds simple enough, but this is a good time to dig deeper into the cupboards (bank accounts) and drawers (money market funds) to fully understand what is lurking around. As businesses grow and become acquisitive they tend to accumulate more accounts than they can manage and cash can quite easily be forgotten or lost, now is a good time to do some digging and get a handle on how much cash rests within the business.

2.Reshuffle the cash: Once the cash has been identified it is a good idea to make a note of where it was discovered and then consider whether there is a better place to store it in the future. In the same way that a priceless family heirloom should be moved from the loft to the kitchen display cabinet, cash should be in an easily accessible location for everyone to see.

3.Upgrade the cash: It might sound a bit like the BBC’s “The Repair Shop”, but polishing up the Treasury policy can help with improving cash for the future. Cash can be upgraded with the following techniques:

–  Assess counterparty exposure:

• Are sufficient counterparty limits in place and adhered to?
• Are exposures based upon external credit rating agencies, CDS pricing, share prices or an element of all three?
• Are there geo-political considerations that need to be applied to particular counterparties?

– Assess cash segmentation:

• Has cash been correctly forecasted and segmented appropriately?
• Where cash has been separated into operational, core and strategic buckets has it been appropriately invested?
• How much cash is ‘resting’ overnight, in non-interest bearing current accounts when it could be working harder for the business?

– Assess the return on cash:

• At the time of issue the Federal Funds Rate was in the 5.00% – 5.25% range, the ECB Deposit Rate at 3.25% and the Bank of England at 4.5%, heights not seen for many years, making cash a highly relevant asset class again in terms of return. What is your current average rate of return?
• How much cash is being taken for granted by counterparties and earning less than favourable rates of return?
• Could cash be used to pay down debt?

A good spring clean is ultimately a great opportunity to improve. Once cash has been properly identified, reorganised and analysed it is time to employ the tried and trusted SLY (Security, Liquidity and Yield) principle to ensure it is future-proofed.

Security was certainly something that came to the fore during the long winter of early 2023 when we saw a number of banks fail, both big and small. Accessing the risk-free rate by investing in Treasury Bills or taking collateral for your cash via a secured deposit is a great way to improve the security of your cash holdings.

Liquidity and having sufficient access to cash when required also became ever more important during the aforementioned bank failures. Using the segmentation method and spreading your cash across different counterparties, that are axed in different tenors, ensures that you are better diversified and compensated for managing your liquidity position.

Yield probably wasn’t a significant consideration the last time you updated your policy but, given the march of inflation and interest rate rises to counteract it, we can expect heightened returns on cash for the foreseeable future. Maximising the return on your cash by accessing the full breadth of the market will continue to be fundamentally important whilst inflation bites.

It’s that time of year to re-group, re-assess and re-frame your existing activities. The team at TreasurySpring are ready to help with this year’s spring cleaning of your treasury policy.