For first-time founders, developing a Treasury Policy, which defines how cash and financial risk are managed, may not be near the top of your list of priorities, but it should be.

Constructing a robust Treasury Policy framework can improve the financial oversight of your business and promote sustainable growth while helping you avoid common cashflow issues.

This brief guide is designed to help you get to grips with this important but complex task.

A Treasury Policy is a document that outlines the way in which your business manages its money and addresses any financial risks it may face. Simply put, it’s a plan to help ensure you’ve got the funds needed to run your day-to-day business, and also to meet your long-term strategic goals.

In addition to enabling efficient management, a Treasury Policy can help you embed sound treasury risk management processes for your business, and map out the procedures, policies and operating parameters needed to safely navigate the changing financial environment.

Managing financial risk in this way is critical for growing your business, as it means there’s a plan in place when challenges inevitably arise. It also gives you a compass to guide your financial decision-making that can accelerate or slow your overall growth.

But it’s not just a framework for future financial choices. A formal, auditable Treasury Policy can cover all the different activities your business undertakes and put operational steps in place to help you anticipate financial risks. These may include FX risk, interest rate risk, liquidity, credit and commodity risk, to name a few.

It is a plan that defines the management of your treasury operations – but how do you go about pulling this kind of framework together?

We have compiled a list of four key actions to provide a solid foundation for your Treasury Policy framework. Although it's not an exhaustive list, and you may need to add further steps depending on your company’s circumstances, these steps can help you develop a basic plan:

1. Identify and assess
2. Evaluate
3. Respond & control
4. Report and monitor

Your objectives should be clear, concise and relevant. You may want to consider how security, liquidity and yield relate to one another. Key considerations include risk appetite; identifying financial risks arising from operational activities; regulatory requirements and banking covenants; the availability of diverse funding and capital sources to support growth; ensuring sufficient liquidity and capital are set aside to protect against short-term stresses; and optimising excess funds for returns.

When defining risks, these definitions should be clear and unambiguous to ensure general understanding. State the size and sources of risk exposure, as well as the types of products that can be used to mitigate them.

Bear in mind that risk measures tend to be determined by the type of risk, too. For example, FX exposures could have risk measures based on value-at-risk (VaR) and credit exposure risks based on the credit ratings, counterparty risk of the banks, or the providers you use.

A risk management policy can also be a useful internal communication tool to ensure a consistent understanding across the business.

Once you’ve defined any potential risk. it’s crucial to review your risk exposure, appetite and triggers, and assign ownership before any risk events occur. Evaluating and modelling the likelihood and size of potential losses or gains can be helpful when setting a strategy to manage risks.

Your risk response not only defines the limits for each risk, but also takes your business objectives and risk tolerances into account.

For example, is it best to avoid the risk entirely, or to try and use controls to reduce the risk impact?  Could the risk be transferred by buying insurance or shifting it to your customers or suppliers? Or should you accept that certain risks may fall within your risk appetite? Be aware that your risk response may create new risks; for example, the use of insurance introduces counterparty risk.

The next step is to define how your business will respond if a risk materialises and what controls could be put in place to prevent risk events from happening in the first place.

The goal is to ensure treasury activities are undertaken in a controlled manner to minimise undue operational risk, so day-to-day risk controls should include a mixture of preventative, detective and corrective tools.

For example, you may choose to segregate staff who initiate payments and those who account for transactions, implement a system of confirmation for all counterparty transactions, and require payment instructions/confirmations to be authorised.

Treasury management reporting is crucial to ensuring your policy’s effectiveness. It provides oversight of your cash position, including transactions against your treasury objectives. You can choose to produce daily reports on the movement of cash, borrowing and lending alongside more in-depth monthly reports that include analysis on cash and borrowing alongside forecasts, a focus on liquidity and the security of funding, and even a review of your bank relationships and services.

Measuring risk exposures, triggers and appetite can be delivered using Key Risk Indicators (KRI). Establish a system for reporting KRIs and the performance of the associated controls so that your key company risks can be controlled.

A performance management framework can help monitor the overall effectiveness of your Treasury Policy and ensure that it is implemented correctly. Many startups choose to have a regular, independent review of the policy, design, operating effectiveness, and control that can be audited.

To provide you with a starting point for creating your Treasury Policy, we have created this example checklist based on our four key components. Note, this checklist is not exhaustive, and you may want to add or remove elements depending on your needs.

IDENTIFY & ASSESS
POLICY NAME What is your document going to be named? e.g. [Company Name] Treasury Policy, Liquidity policy etc?
POLICY OBJECTIVE What is your Treasury Policy trying to achieve? Objectives: security, liquidity and yield
RISK DESCRIPTION What are your risks and how do they arise?  Define your risks
EVALUATE
RISK EXPOSURE What is your exposure before and after existing risk mitigation? Express as the likelihood and size of potential loss or gain. The measure could vary by type of risk e.g. counterparty credit exposures based on credit ratings. Additionally, are there any natural hedges (offsetting risks) in your company that reduce the exposure?
RISK APPETITE What is the amount of this risk that your company is willing to take to meet your objectives? The risk exposure typically should not exceed your pre-agreed risk appetite.
RISK OWNER Which individual/department is responsible for managing the risk? Include when the treasurer should report back to anyone e.g. the board/FD in the company, and list authority limits (if not specified elsewhere).
RISK TRIGGERS What are the risk triggers, have they been determined and approved and is an action plan in place? These triggers are usually warning signs that the exposure is approaching its risk appetite and action may be needed. You may want to create reports to escalate to senior management with recommendations on how to manage the risk exposure, such as reducing the underlying risk or mitigating the exposure.
RESPOND & CONTROL
RISK RESPONSE AVOID, TRANSFER, REDUCE, ACCEPT What is your risk response? This should typically align with the policy objective, for example, eliminate FX transaction risk due to foreign currency receivables. Some options for the risk response: i) Avoid (e.g. don’t enter a market) ii) Transfer (e.g. by insurance or to 3rd party) iii) Reduce (e.g. using controls); and iv) Accept (e.g. if not material)
KEY RISK CONTROLS What are your key risk controls? A mixture of risk controls can be described here: preventative, detective and corrective. List authorised instruments and, if necessary, hedging strategies. List authorised counterparties with risk limits.
REPORT & MONITOR
KEY RISK INDICATORS Have you selected KRIs that measure the risk exposure, related hedges (if relevant), risk triggers and risk appetite?
REPORTING Have you established a system for reporting KRIs and the performance of the associated controls so that senior management can monitor and control the key risks within the company?
ASSURANCE Have you developed a system for ensuring that treasury policies are implemented as agreed? For example, independent regular review of the policy, and design and operating effectiveness of controls.
UPDATE OF POLICY Have you defined the process for updating this policy, including the frequency of update and approval process?

Startups in the innovation ecosystem may reach profitability quickly, so it can be helpful to develop a cash investment strategy in advance. Cash investment is about identifying appropriate investment objectives for different tranches of cash throughout the economic cycle, and there are numerous opportunities for investment.

Cash management solutions may encompass investigating a wider range of assets, and you may need to update or introduce new Treasury Policy guidelines or benchmarks. Your bank will likely offer a comprehensive set of banking products and solutions, including cash management, foreign exchange risk solutions and financing solutions that are designed to help your business to scale and grow for success. It’s best to engage directly with your bank so that you understand all of the solutions available.

From mitigating risks to enhancing operational efficiency and improving financial oversight and control, taking a holistic approach to treasury can be an effective way for your business to navigate liquidity and cash flow management.

Our action points aim to help you shape your own Treasury Policy framework so that future financial decisions can be made effectively.

Need more detail? Click here to access a more comprehensive version of this guide.