This article was updated June 23, 2023.

Protection of cash within your business is always critical, but it’s especially key in times of disruption, whether from market volatility or uncertainty in the banking sector.

It’s important for private businesses to consider cash flow and treasury management best practices that are commonly employed by large public companies, endowments, and government entities.

By definition, treasury management is the act of managing a company’s daily cash flows and larger scale decisions when it comes to finances to achieve strategic and operational objectives. And the way many companies implement a treasury management function is through the use of an investment policy statement, which is also known as an IPS.

Simply put, an investment policy statement is a comprehensive framework that outlines the strategy for your investments, roles of those involved, and expectations for monitoring and benchmarking the strategy. Within this treasury management function, it’s important for the company’s IPS to have depth and understanding within the cash asset class.

Following, you’ll find background and next steps to build your strategic investment policy statement:

• What is treasury management?
• Why is treasury management critical?
• Is treasury management the same as cash management?
• What is treasury management as it relates to banks?
• How to create a strategic investment policy statement in 6 steps

For financial managers, it’s important to think about your decision-making and governance processes. Through those processes, the data you collect allows you to create an investment policy statement to utilize through marketplace disruption.

Large companies prioritize treasury management. This is one business approach that doesn’t discriminate based on size. For small to middle-market companies, you can implement similar best practices from those world-class organizations to manage your cash, cash flow, and excess liquidity.

The reality: Some organizations haven’t prioritized their treasury management function, and that could be a key contributor in the disruption affecting today’s banking industry.

Addressing treasury management going forward could help put controls in place geared toward keeping your liquid capital safe. But remember that it isn’t solely to provide an additional layer of safety. Organizations implement these strategies because they could pay off via higher yields on cash.

You can organize around your capital structure and work toward increasing your return on investment (ROI) with strategic reserves. Also, the yield curve materially adjusted in the past year when the Federal Reserve started raising interest rates. This allowed businesses to seek stronger ROI on their cash. That showcases a current marketplace disruption that could result in opportunity.

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 Account

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

Strategic Reserves

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
• Documents for decision-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.

Additional Resources

• Private Clients Practice