Treasury Management: Investment Management

Study Notes

Surplus funds not needed for operating purposes or compensating bank balances are available for investment.
Prudent use of these funds can add to income, but the treasurer must consider a range of investment criteria, types of investments, and investment strategies.

Investment criteria are the defined set of parameters used to assess an acquisition target.
Safety of the principal being invested is the first consideration.
Other criteria include:
Management Team: look for teams with great entrepreneurial potential.
Market Opportunity: demonstrate a strategy to claim significant market share or revenue.
Use of Proceeds: funds must be used to accelerate company's achievement of key milestones.
Growth Potential: demonstrate a plan to generate significant profits.
Competitive Advantage: must have some proprietary features that distinguish you from potential competitors.
Strategic Fit: significant executive experience in a variety of fields.
Technology: invest in first-of-a-kind new ideas.
Exit Strategy: a clearly articulated exit strategy is essential.

Common investment options with low risk levels, short maturity dates, and high levels of marketability:
Bankers' acceptances
Bonds near maturity dates
Certificate of deposit (CD)
Commercial paper
Money market fund
Repurchase Agreement
U.S. Treasury issuances

The treasurer should develop a standard methodology for investing funds.
Strategies range from passive to active and require continuing decision making.
Common investment strategies:
Earning Credit Strategy: use earnings from idle balances to offset service fees.
Matching Strategy: match the maturity date of an investment to the cash flow availability dates.
Laddering Strategy: create a set of investments with a series of consecutive maturity dates.
Tranched Cash Flow Strategy: determine what cash is available for short, medium, and long-term investment.
Riding the Yield Curve Strategy: buy longer-term securities and sell them prior to their maturity dates.
Credit Rating Strategy: buy the debt of a company that may be on the verge of having its credit rating upgraded.

A risk management strategy is a key part of the risk management lifecycle.
Risk reduction strategies:
Avoid investments in the securities of any single entity.
Invest solely in one or more money market funds.
Use the FDIC insurance coverage.
Use the Certificate of Deposit Account Registry Service (CDARS) to achieve FDIC coverage on up to $50 million of deposits.
Create a sweep account to automatically sweep funds out of a concentration account and move into an interest-earning account.

The process of issuing funds for an investment is unique in that every step in the process is a control point.
Controls are essential to ensure that investments are made in accordance with the investment policy and strategy.

An investment policy is used to define the level of risk that a company is willing to tolerate.
The policy should define the exact types of investment vehicles to be used (or not used).
The policy should cover the level of allowable liquidity.
Risk is a critical factor in the policy.
The policy should be closely aligned with the investment strategy.

Procedures should be established to ensure that investments are made in accordance with the investment policy and strategy.
The procedures should be regularly reviewed and updated to ensure that they remain relevant and effective.