Optimising Treasury Functions: POLICIES – Ensure practicality before requiring compliance
Policies should govern the roles and responsibilities of an organisation’s people and processes, which means expectations for risk mitigation are prescriptive, appropriate and consistently meaningful.
- No policy exists
- Aged policy misaligned to commercial objectives & current risk environment
- Inappropriate or lacking acknowledgement of commercial risks
- Lacking delegation of authority
- Policy is written prior to designing and implementing practical business operations
- Inappropriate objectives
- Treasury and commercial risk assessment
- Writing and implementation of policy and risk management framework
- Periodic scheduled policy reviews
- Policy that empowers staff in the proactive management of the businesses risks
A thorough policy design clearly defines its aims and required actions across all material activities the policy governs; it eliminates ambiguity in required actions and when those actions are required. It clearly defines parameters for what constitutes policy compliance and escalation activity to alleviate the problem. A treasury policy aligns the commercial and risk management objectives of the enterprise.
The writing of a policy is often best done after an effective process that a policy is meant to govern is successfully implemented. This approach prevents policy development from being an overly academic exercise that fails to acknowledge the practical implications and
current system limitations of the business. Development of the policy itself, from a conceptual level, should be pursued and discussed as a governing mindset throughout the process development stage.
With the correct development approach, implementation of a policy once it is written is almost a moot point. Since the policy is written to represent now existing processes, implementation, perhaps unintuitively, should occur before writing.
The key to effective operation regarding policy is thus consistency and operational discipline against clearly defined expectations pragmatically aligned to business capabilities. Once an effective operation is established that is aligned to commercial strategy and risk appetite, repeating the maintenance.
Why the challenge was proving difficult to solve:
- Increasing cash flow forecasts of publicly listed entity meant that the size of potential losses from otherwise typical market moves was rapidly increasing
- The finance team and Board did not have direct experience developing an appropriate treasury policy
Rochford actions to address and correct the problems:
- Rochford consulted with the CFO and presented a proposed hedging policy to the Board for approval
- We then worked with the finance team to execute an initial hedging strategy that ensured base compliance
- Ongoing proactive hedging decisions are now advised by Rochford with an appropriate product mix to ensure compliance, which we report on a monthly basis
End outcome, leaving the business in a better position than at the start:
- Investors can encourage the Engineering, Sales and Finance team to focus on growing commercial opportunities in confidence their risk management program will scale alongside them
- Heightened revenue certainty from a smoothed earnings profile has reduced the business’ cost of capital and risk premium applied by investors, generating increased gains to enterprise value