by Britta Hion, Director, Head of International Corporate Cash Sales, BlackRock
The management and control of surplus cash is a critical treasury department function. The Cash Investment Policy Statement (IPS) allows a company’s board of directors to understand and define how surplus cash is managed, and delegate written authority allowing a treasury department to invest a company’s cash on a daily basis. For corporate treasurers who have yet to establish or have not recently evaluated their existing cash investment policies, now is the time.
What is an IPS?
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. 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.
In short, an effective IPS provides a means for communicating the objectives for and permitted level of risk in a company’s cash portfolio. The IPS should provide guidelines for those responsible for management of the company’s cash, whether that is an internal or external manager.
Before developing an IPS, it is important to conduct a thorough evaluation of the company’s cash needs and to pinpoint its risk profile. Effective forecasting of liquidity needs and assessment of risk tolerance allows for the best opportunity to achieve excess returns within a cash portfolio.