Putting a treasury's policies and procedures into writtenform seems like a good idea, but not all treasuries have formalwritten policies to guide the various types of work they do,according to a surveyby the Association for Financial Professionals.

The incidence of formal written policies varies widely by thetype of activity, with investment management policies the mostcommon. More than half (56%) of the 554 treasury practitioners AFPsurveyed said their company has a formal written policy forinvestment management, while 20% said they have written guidelinesor procedures for investing and 13% use unofficial operatingstandards or rules of thumb.

“Any time you're dealing with money, it's always good to havepolicies and procedures to be your backstop, well-documentedprocedures to make sure you're doing things correctly and they'rereviewed by your auditors,” said Thomas Hunt, director of treasuryservices at AFP. Hunt described such policies as “a safety factor,something that you can fall back on and have confidence in, andthat helps you when things get tough.”

AFP asked survey participants whether their treasury has formalwritten policies, written guidelines and procedures, or unofficialoperating standards. Hunt says formal written policies have beenreviewed and approved by the company's senior management or board,while written policies and procedures are “more of an operatingguide or help define the tactical approach for the procedure ortask.”

After investment management, treasury governance was the areawhere companies were most likely to have formal written policies,with 39% saying they had a formal written policy, 38% writtenguidelines or procedures and 21% informal operating procedures.Treasury governance policies cover “who can do what in theorganization,” including which executives can open and close bankaccounts and who can issue debt, according to Hunt

More than a third (34%) of the companies had a formal writtenpolicy on customer and vendor credit evaluation and approval, whilean equal percentage had written guidelines or procedures. And justunder a third (32%) had a formal written policy on FX management,while 19% had written guidelines or procedures on this topic.

Dan Carmody, managing directorat consultancy Treasolution in Chicago, said hewas surprised at the number of treasuries that did not have formalwritten policies. “It's a best practice to have a formal approvedpolicy in place,” he said.

Carmody, pictured at left, said he has seen a trend toward moreuse of written policies among treasuries with which he has worked.“Primarily since the financial crisis, there's been a large pushtoward documentation of policies and procedures,” he said, addingthat the practice aids treasury departments in a number of ways,such as the support it provides for the cross-training ofpersonnel.

The executives surveyed overwhelmingly cited risk mitigation asthe main objective of their FX and interest rate managementpolicies (89%), investment management policies (87%) andcustomer/vendor credit evaluation policies (82%). But 73% saidfinancial performance was the main objective of their cashconcentration and forecasting policy, with just 54% citing riskmanagement as an objective for that policy.

Hunt linked that focus on financial performance to the roleforecasting plays in companies' working capital management. “Howefficient are you in using your cash? Forecasting is foremost inthat. Just making sure that if there are any lumpy cash flows,you're ahead of them, and you mitigate any uncertainty in theenvironment in terms of your cash needs, ultimately that's going todrive your financial performance,” he said.

Investment management is not only the area for which treasuriesare most likely to have a formal written policy, it is the areamost likely to be overseen directly by the board of directors.Fifty-three percent of the practitioners said the board ofdirectors oversees their investment management policy; the boardoversees just 34% of FX and interest rate management policies andonly 18% of cash concentration and forecasting policies.

“Liquidity has become so key through the financial crisis,” Huntsaid. “The board's reviewing it, the CFO is reviewing it. The lastthing they want to say is we lost principal because we went for anextra 10 basis points.”

When it comes to putting a policy in place, Treasolution'sCarmody said one size does not fit all. “Oftentimes, policies haveto be created,” he said. “It should really be customized to yoursecurity and organizational requirements.”

And in the process of writing the policy, “the more feedback youcan get from other areas within the organization the better, likeinternal audit” Carmody added. Accounting should be consulted onpolicies that pertain to accounting, he said, and someone from theIT department brought in to help put together a policy related tothe treasury workstation.

Hunt noted the strong tendency toward centralized policies.Sixty-nine percent of the executives said their company mandatesenterprise-wide policies and another 15% say enterprise-widestandards are recommended. That's even more pronounced amongexecutives from companies with $1 billion or more in revenue, 82%of which said enterprise-wide standards are mandated and 11% saidthey're recommended.

“It's important to have all the finance people using the samestandards and understanding the mandates that are coming down fromthe CEO and the board,” Hunt said. “The last thing you want to haveis multiple policies – that's when you have surprises, things youdidn't know you had, exposures you weren't planning for.”