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Cash & Liquidity Management
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The Cash Investment Policy Statement – Developing, Documenting and Maintaining a Cash Management Plan

by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock

The face of the cash management industry is changing. Once thought of as a homogeneous, no-risk asset class, the cash market is now recognised as multi-faceted, complex and, to be sure, subject to risk. For corporate treasurers who have yet to establish or have not recently evaluated their existing cash investment policies, now is the time. In this article, we examine the issues surrounding the cash investment policy statement and offer institutional investors some suggestions and best practices for establishing, updating and/or maintaining this important roadmap for managing their company’s cash.

What is an IPS?

According to the CFA Institute, an IPS “addresses the client’s risk tolerance, return requirements and all investment constraints (including time horizon, liquidity needs, tax concerns, legal and regulatory factors, and unique circumstances). The IPS also should identify and describe the roles and responsibilities of the parties to the advisory relationship and investment process, as well as schedules for review and evaluation.”

An IPS is a document designed to identify the goals and objectives for a company’s investment portfolio(s), as well as allowable parameters for achieving those goals. The document generally contains specific information about a company’s risk tolerance and liquidity needs. The IPS should be broad, yet explicit in terms of interpretation. Generally speaking, an IPS also should be:

  • Specific to each company’s situation,
  • Dynamic and flexible to meet current market and firm needs,
  • Able to adapt to changing needs, but reflect total risk tolerance, and
  • Easily modified (with proper analysis and approvals).

Having a documented policy for the administration of the company’s cash is among the most effective means of risk management, serving as a clear and constant reminder of the firm’s goals and ability to tolerate risk. We believe the IPS should be part of every firm’s risk management protocol, incorporated into an annual board review process (typically by the audit committee) and updated on a regular basis. It will be important to determine: