Why you should implement your 1st treasury policy

Treasury Spring - Cameron Doogan

Cameron Doogan

Associate, Venture Capital and Private Equity
Tuesday, Nov, 21, 2023
2mins

I took a personality test recently and apparently I am an ENFJ. In layman terms that means I probably talk too much… But I’m sure I am not alone in thinking that public speaking is a daunting exercise. I was extremely fortunate that Claudia Rowe (Investor – Balderton Capital), Jennifer Pearson (Founder – TreasuryEdge) and Madhu Murali (Head of Finance – Moonfare) recently sat down with me for a timely conversation on why startups should implement a treasury policy for their business.

Before delving into the specifics of the conversation, let me define what a treasury policy is. Simply put, it is a formal document which details the efficient management of financial risk within a company ensuring that all objectives, policies, and operating parameters are clearly defined.

To start the discussion, I ran a poll to find out who had a treasury policy in place and roughly half the room raised their hands. Admittedly, I was a little surprised when my follow up question asking if a treasury policy was in place prior to the March 2023 banking crisis was met with a similar show of hands. What became evident as the conversation unfolded was that many policies contained gaps that needed to be filled. This paved the way for our panellists to impart their knowledge to help overcome these challenges:

1. The implementation journey

Blank sheet syndrome can be difficult to overcome, but there are a variety of resources out there to guide businesses as they put a policy together. Jennifer mentioned that the “first policy you put together does not have to be the finished article. It can take up to 6 months to have a document in place that has final sign off on every aspect of your treasury function.” I found this very reassuring, bearing in mind you may not know where to start when you begin to tackle this project.

Claudia’s background as an investor was extremely insightful as she was able to specify what the board committees are looking for before they approve a policy. “The earlier you can implement a policy, the better. As we saw during the SVB crisis, no company is immune to financial risk. Keeping it straightforward and concise will ensure better decision making and better risk governance.” Ultimately the journey to finalising your policy will take some time. Highlight the key risks your business has exposure to and rank them in order of importance! You should then implement solutions that will minimise these risks and get sign off from your internal committee and board members during or straight after you complete the onboarding process with each solution.

2. Cash Management – Security, Liquidity, Yield!

The banking crisis back in March 2023 highlighted the lack of attention that was being paid to cash management. A benign interest rate environment coupled with a booming stock market meant growth at all costs was the primary objective for most startups. When I asked the panellists if risk mitigation or maximising yield was their primary driver when investing their excess cash, there was a unanimous agreement that minimising risk was the leading factor that firms should consider. Jennifer said “you’ll never be thanked for an additional 10 or 20K (of interest income), but if you lose it, bad things are going to happen.”

One anecdote that stuck out for me was Madhu’s scientific strategy behind segmenting her funds and the response from the board. “The most useful thing that the board appreciated in the end was a cash runway and product term matrix. This would say I need X amount of millions for six months of cash burn needs… and this cash would sit in a daily liquid product. On the other end of the spectrum, you will have cash that you don’t need for the next 24-36 months, and you should put it away… into a long-term maturity product and look to earn 5-6%” (or relative yield for your respective currency). Madhu went on to say that she chooses to invest in a variety of ultra-low risk short-term cash instruments such as Government bills, Fixed-Term Funds and short-term deposits, but stressed that diversifying your counterparty geographies is just as important as the number of counterparties.

3. Risk Controls – Who does what?

Defining individual responsibilities is crucial before getting the final approval on your policy. You must specify which individual or department is responsible for managing each risk, as companies are shifting to a centralised risk management approach. Jennifer has worked at companies ranging from FTSE 100 listed corporates to early-stage startups and says “if you are an early stage startup, the senior people in the finance team will have to take control.” Depending on how much depth you have in that finance team, you should ensure other founders / C-suite executives are briefed with decisions that are made with the company’s funds. For Madhu, she has a well-established finance team and their policy has a “6 eye approval process in place; one uploader and two approvers”. She continues on to say “at the very basic level, always have 4 eyes with the finance director being one. Document your process and stick to the controls you have in place.”

4. Looking forward – How often should you review your policy?

So you’ve created your treasury policy and it has been approved by the board as an eligible licence to act. But once it’s been set, that doesn’t mean it will stand the test of time. Market conditions change, companies grow (or restructure) and with the volatile market that we currently find ourselves in, it is vital to ensure your policy remains up to date. Recently, Treasury Management International (TMI)* partnered with Northern Trust Asset Management (NTAM) to carry out a survey on corporate treasury trends in short-term investments and the survey revealed that 16% of the respondents only managed to review their policy every few years, let alone at all, highlighting the challenges for many overstretched treasurer’s/financial professionals. Madhu mentioned that “It’s a quarterly review of the policy itself – a sanity check to see if it’s still relevant, any new considerations based on new operations, geographies etc. Key business changes impact your policy, but that being said, you need something robust enough to already keep these developments in mind.”

I want to extend my thanks to Claudia, Jennifer and Madhu for agreeing to sit down with me and our audience to share some extremely valuable insights into implementing a treasury policy. It may be hard to pinpoint where to start and decide which solutions to use, but once you have that framework in place and embedded into your finance function, it will remove ambiguity and ensure senior decision makers have the time to focus on other matters at hand.

*Treasury Management International survey

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