By Jennifer Pearson | Founder of TreasuryEdge
How to write your first treasury policy, without being a treasurer
Accepting investment comes with responsibility, and that is to use the funds for their intended purpose – to grow your business. Investors are laser focussed on business growth metrics such as annual recurring revenue and cost of customer acquisition. However, where the conversation falls short is how to operationally manage this new pot of money which is in your control. You know you should be investing it, thinking about which bank to use, and cash forecasting your needs, but you’re not sure how to get started. If this sounds familiar, this article is for you.
Writing your own cash management playbook
A treasury policy is basically your own cash management playbook. A document which captures the decisions you’re already making across your cash, banking and your wider financial risks, so they stay consistent, easy to explain, and agreed in advance. To make the exercise of writing a treasury policy as valuable as possible you should keep the body of the document lean and only include relevant information, you want this to be a document you reach for and use regularly not a ‘set and forget’, as so many policies are.
Start with a few clear principles:
1. How safe does your money need to be? “We hold a maximum of 40% of total cash in a particular bank with a credit rating of A and above”
2. How much should stay within reach. “We will always maintain at least one month of expenses as liquid cash in an instant or easy access bank account”
3. What you’re comfortable doing with the rest. “Any cash not needed for immediate use can be invested in a deposit account offering a higher interest rate”
4. How you’ll manage payments effectively. “All payments require at least one approver, and any payment above £100k requires 2 approvers”
5. How you will protect profits from a change in the market. “We will lock in interest rates on 20% of cash holdings for the coming quarter”, “We will fix an FX rate for USD expenses 6 months in advance”
Cash Flow Forecasting
Once you have listed all the guiding principles, then you can tackle the more detailed and process-based tasks which will allow you to enact those principles. If you are starting to invest cash that you don’t need for the coming month, then you will need a cash flow forecast to identify how much you are expecting to spend. These processes you can build over time, and document them in appendices to the main policy document. Consider whether using quality tools would help, instead of running a forecast in a spreadsheet it might save you time to invest in some software, especially if you operate a lean finance team. Starting with a good AP/ payment automation tool like Ramp or Moss, plus a simple planning tool like Casual are relatively intuitive and with useful extra features.
A trusted banking partner
A supportive banking partner can make all this easier. A named contact who understands your business, and who offers competitive rates, easy access to your funds, and a clear view of how your cash is managed can make a real difference. For example, United Trust Bank (UTB) offers a dedicated relationship manager who will support you as you grow, a rarity in the banking market nowadays. The team can support you to deploy your policy, finding the right bank account and savings product to protect you in the long term. Easy or instant access, for example, no longer means little or no interest. UTB’s Easy Access account for businesses currently pays 3.5% Gross/AER variable* with a minimum £5000 balance. And money you can lock away for longer, say 15 months, can currently earn a fixed 4.52% Gross/AER for that period**. There are lots of other accounts available in between so it’s handy to have someone who can help you navigate your options.
Start today!
It’s probably not the most exciting task on your to-do list, but do it anyway. Map out the high-level principles and a plan on how to meet them to effectively manage the cash and risk in the business. It will save you time in the long run, help you to make the most of your funding and maybe even help you sleep a little easier tonight.
*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. Gross is the interest rate without the deduction of income tax. Interest is paid gross into your account.
***The minimum balance is £5,000.00 per account and maximum balance is £5m per account.
The standard FSCS protection limit for eligible is £120,000 per eligible person, per eligible institution. For personal joint accounts, this protection extends to £240,000 in total (£120,000 per named account holder).
Although this article may contain helpful information and tips, this is not advice. You may wish to seek advice from a financial advisor if you are unsure about next steps. Any views expressed in this article are those of the authors not United Trust Bank.